The threat of eliminating the tax exemption may have been short-lived, but it created one of the most compelling municipal bond opportunities in years. During the debate over the One Big Beautiful Bill Act, the market repriced long-dated municipals as though the loss of tax-exempt status had become a permanent risk. Although the proposal ultimately didn't become law, that disconnect created an attractive entry point for investors because prices reflected tax policy fears — not deteriorating municipal credit.
Issuers remain in a strong position
Municipal issuers were — and still are — in a strong position. State and local balance sheets remain healthy overall, supported by reserves built during the pandemic, resilient tax revenues and generally conservative fiscal management. Any budget deficits are likely to be covered by a blend of spending cuts and withdrawals from those reserves. In other words, the fundamental backdrop has remained supportive, even as prices moved around on headlines and technicals.
The steep muni curve is the opportunity
We continue to think investors can't let the fear of duration block them from taking advantage of the steepness of the muni curve. The 2/30-year Municipal Market Data (MMD) curve is currently +189 basis points, versus about +89 basis points on the 2/30-year Treasury curve. In our view, that's a clear signal that investors are being paid to extend in municipals.
Retail investors often worry about inflation and rising rates, which can lead them to overweight shorter maturities even when the long end offers significantly better value. In our view, that mindset can result in investors giving up meaningful income by avoiding duration.
In this environment of tight spreads and lofty equity valuations, it's important to stay up in quality. It's important to look at munis versus all the alternatives. Tax-adjusting munis gives investors a better sense of whether or not they are being compensated for the muni risk versus credit risk.
Compelling tax-adjusted pickup
From a relative value standpoint, long-duration munis still offer the highest yields on a tax-adjusted basis for those in the highest tax brackets. Generic AAA-rated municipals in the 30-year part of the curve are yielding 4.32% (as of July 16, 2026). That is a 7.29% taxable-equivalent yield for those in the highest tax bracket and a 226-basis-point spread over 30-year Treasuries (see Figure 1).
Heavy supply has been absorbed
The supply calendar is another reason we think selectivity and curve positioning matter. In 2025, total municipal supply finished at $595 billion. In 2026, supply is expected to finish around $600–$610 billion, which would be a record year. Heavy supply doesn't automatically mean weaker performance, but it can create more frequent opportunities — especially if bouts of volatility reappear and long munis cheapen on headlines rather than fundamentals. For active managers, those technical dislocations can create attractive entry points without requiring a change in the underlying credit outlook.
Inflation has improved
An improving inflation backdrop is another reason we're more comfortable extending duration today. While inflation remains above the Federal Reserve's target, many of the upside risks that concerned markets earlier this year have eased, and more timely indicators suggest underlying price pressures continue to moderate. That reinforces our view that investors shouldn't let fears of duration keep them from taking advantage of today's steep municipal curve.
We are avoiding the front end
We are avoiding the front end of the municipal curve. In our view, relative valuations are not attractive relative to comparable Treasuries, corporates, and agency mortgage-backed securities. A key reason for this is the exponential growth of the retail separately managed account (SMA) market, which is primarily focused on municipals with maturities of 10 years or less. That concentration of demand has pushed valuations at the front end of the curve to levels we view as unattractive relative to Treasuries and other high-quality alternatives.
A taxable alternative to Treasuries
By contrast, for investors who do not require tax-exempt income, we think there are better opportunities elsewhere in fixed income. Within the taxable bond universe, an alternative to Treasuries are bonds that are lease-backed structures with payments supported by cash flows from hyperscalers, such as Google, Microsoft, Meta, and Amazon. In our view, these high-quality issuers offer attractive spreads and better relative value at the front end of the curve than traditional municipal debt.
Bottom line: Opportunity remains
The threat of losing tax-exempt status was short-lived, but it created a meaningful dislocation in long munis. In our view, the opportunity is still clear for taxpaying investors: the muni curve is steep (+189 basis points from 2 to 30 years), the tax-adjusted pickup versus Treasuries and corporates remains compelling, and investors are being paid BBB- or BB-like spreads for AAA muni credit on a taxable-equivalent basis. For investors in higher tax brackets willing to look beyond short-term headlines, we believe the long end of the municipal curve remains one of the most compelling opportunities in high-quality fixed income today.
Important information
All investments involve risk including the loss of principal. Any mention of asset classes, sectors, securities or companies of for illustrative purposes only and not a recommendation to buy or sell any financial instruments.
